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Young tech startups turn to corporate sugar daddies: Gadfly

Mon, Mar 14, 2016 - 9:56 PM

[NEW YORK] All over Silicon Valley, the screws are tightening for unprofitable young technology companies. And in their zeal to show they are not heading to the startup scrapheap, more tech firms are turning to corporate sugar daddies.

A growing number of tech firms that sell consumer gadgets or services - including food and grocery delivery startups, fitness-band maker Fitbit and ride-sharing apps - are finding ways to make businesses, rather than consumers, help fill the coffers.

The appeal of this approach is obvious: People are penny- pinching, demanding monsters who want everything to be awesome, instant and free. Businesses have money and aren't afraid to spend it, and the stream of revenue from them can be more reliable. That's essential in these times of shorter leashes for tech companies that can't get by without an endless stream of venture-capital dollars.

In one prominent example, grocery delivery startup Instacart has in the last six months or so found ways to make General Mills and other food brands help cover the costs of home-shopping deliveries, my Bloomberg News colleague Ellen Huet wrote on Friday.

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After all, bribing a shopper to buy US$15 worth of DiGiorno frozen pizzas or Häagen-Dazs ice cream is exactly what packaged- food companies have done forever with coupons, free samples and so on. Instacart is also coaxing some supermarkets to pay a commission for each item sold, with the idea that people are likely to buy more if they hire Instacart agents to do the annoying task of grocery shopping.

Instacart may have little choice than to hunt for corporate revenue sources. A lot of people simply won't pay US$6 for a grocery delivery. It's the Amazon effect. The online retailer has conditioned customers to expect to have anything they want show up on their doorsteps quickly and for no added cost. Delivery fees paid by customers now generate less than half of Instacart's revenue, Huet reported.

In another unproven corner of the tech world - restaurant delivery services such as GrubHub, Postmates and DoorDash - merchants are also covering some of the costs. On a typical $30 order outlined recently by GrubHub, two-thirds of the company's $9 in revenue comes from the restaurant-paid commission, with the rest from the customer delivery fee. For DoorDash, the customer fee of roughly $5 goes to pay the DoorDash contractor who delivers the food. DoorDash makes all of its money from charging restaurants a cut of each food order. Fitbit says it generates less than 10 percent of its revenue from helping companies with their employee wellness programs, but the company has said it plans to stress these sales. Corporate subsidizes are also a boon for carpooling app Scoop, which connects people who drive to work with co-workers who want a lift.

Instead of a Cisco employee paying the typical $6 fee for passengers, the company's subsidy takes the cost down to $1 for each ride. Not surprisingly, Scoop CEO Rob Sadow says that when employers pick up some of the tab, "the difference is dramatic" in the number of rides on Scoop compared with those that require passengers to pay full freight. And, Sadow says, it gives Scoop users "confidence that the business won't fail." That's no small risk. Another on-demand ride company, Sidecar, shut down a couple of months ago.

Some consumer technology companies are simply ditching the pesky consumers altogether and going all in with companies. Zirx, a startup that offers valet parking on demand, dropped its consumer service in favor of valet parking services for companies. "Consumer on-demand parking ... is a very difficult business to scale. And an even harder business to scale to great profitability," Zirx wrote in a blog post last month.

The "making companies pay" idea isn't novel. The entire advertising industry for television, newspapers and online services including Google and Facebook is a way to make corporate marketing departments subsidize consumer information, entertainment and communications. And tech companies including Microsoft and Oracle were built to grab chunks of the roughly US$2 trillion each year that companies spend on technology. Startups including Evernote and Dropbox that made software tailored to consumers have shifted their approach to sell their wares to companies, too. Expect more of this. For young technology companies, there's far more pressure now than there was even six months ago to show they can turn a profit, or at least have a path to doing so in a reasonable time, before all they have left are the ashes of the investor cash they set on fire. In times of desperation, those corporate sugar daddies start to look a whole lot more appealing than fickle consumers.

Of course there's that $99 annual fee for a Prime membership. Food companies aren't the only target of Instacart's zeal for bigger bucks. The company is also raising delivery fees for some customers and cutting the fees it pays its couriers in two large markets. An explainer for confused people who live outside the Bay Area: Using a valet parking app like Luxe, drivers can summon a scooter-riding valet who arrives at predetermined location and parks the car in a lot nearby. When they're done at the office or at dinner, they tap the app again to order the valet to return with the car. Yes, these services actually exist. For now.